Academic journal article Monthly Labor Review

Flows of Capital

Academic journal article Monthly Labor Review

Flows of Capital

Article excerpt

According to standard economic theory, there should be a net flow of savings from more developed countries to less developed countries because the marginal returns on capital are greater in the less developed nations. However, history has shown that capital does not always flow in that direction. Indeed, in the current global economy, it appears that capital is, on the whole, flowing "upstream" (that is, from less developed market economies to more developed market economies). For example, in the 1960s and 1970s, the U.S. current-account balance was not far from zero. However, the United States began to save less and less, and in 2006 the Nation's current-account deficit peaked at 6 percent of gross domestic product.

Economist Simona E. Cociuba sheds light on the international flow of capital in "Upstream Capital Flows: Why Emerging Markets Send Savings to Advanced Economies" (Economic Letter, Federal Reserve Bank of Dallas, May 2011). The article includes a basic description of how capital flows work:

   Capital flows are streams of
   surplus savings channeled into
   or out of a country.... Any
   savings not invested domestically
   is sent abroad in the form
   of goods and services.... A
   country with a current account
   surplus is a net lender. … 
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